Electronic commerce over the Internet is rapidly increasing day by day and is poised to constitute a significant portion of overall commerce worldwide in the coming years. Significant advances in the areas of computer and communication technologies have made possible a seamless exchange of information between electronic devices, which may be located all over the world. Online mechanisms for buying and selling over the Internet (for example, catalogue sales, auctions of various kinds, and two-way trading) have come into existence and are being widely used. These have led to the creation of online shops, online auction markets and other online marketplaces for buying and selling various kinds of components and goods. Newer forms of electronic marketplaces with different market structures and business models are being created almost everyday.
Despite the technological developments and the increasing popularity of the Internet as a medium for doing commerce, much of the electronic commerce remains confined to localized geographical groups and within respective countries. One of the important reasons for this phenomenon is the fact that an electronic commerce transaction is faced with a number of uncertainties and risks, which are not adequately handled by the existing systems and methods for electronic commerce. These uncertainties and risks may originate from price changes, currency fluctuations, counter party default, nonconformance to quality and quantity specifications, shipment and payment delays and many other such sources.
The changes in the price of the underlying item being sold over the duration of the online negotiations and the horizon preceding delivery and payment constitutes a risk for the buyer as well as the seller. Risk mitigation mechanisms for item price risk have been in use for hedging in the off-line world for a long time. These include various kinds of derivatives like forwards, futures and options on the underlying item. However, the online marketplaces do not provide any known means whereby the presence of such hedging means can be effectively utilized for price discovery and subsequent mitigation of the item price risk. There is also an absence of understanding on how such means in electronic marketplaces would differ from the corresponding means in the off-line world.
Similar to item price risk is the risk posed by fluctuating currency exchange rates which becomes particularly important for trans-national commerce. When the two counterparties to an online negotiation have different currencies, the fluctuation of currencies exposes at least one of them to foreign exchange risk. This is a serious impediment in the successful internationalization of e-commerce. The existing electronic marketplaces have not addressed this problem adequately. The prior art on currency risk provides with third party services which present transactable exchange rate offers to clients. For example, U.S. Pat. No. 5,787,402 (Method and System for Performing Automated Financial Transactions Involving Foreign Currencies) issued on Jul. 28, 1998 to Potter et al. describes one such system. The prior art also discloses some simple forms of exchange risk mitigation means. For example, U.S. Pat. No. 6,128,598 (System and Method for Generating and Executing Insurance Policies for Foreign Exchange Losses) issued on Oct. 3, 2000 to Walker et al. describes the use of an insurance policy for this purpose. Further, U.S. Pat. No. 5,897,621 (System and Method for Multi-Currency Transactions) issued on Apr. 27, 1999 to Boesch et al. describes a system and method whereby the two counterparties transact in their respective currencies and the risk is borne by an intermediary who charges for this service. This is also similar to twin-insurance, one issued to buyer and one to seller. The prior art does not provide for a means by which the negotiation and matching process can itself take into account, the currency fluctuation effects and can effectively make use of the third party services (such as those providing contractable rates for present and future dates) for matching and price setting as well as for hedging.
Another source of uncertainty and risk in cross-border e-commerce is related to the fact that the counterparties do not know each other and have no direct way of making inferences about each other's creditworthiness and reliability with regard to adherence to quality and other specifications. A method of risk classification of buyers is disclosed in U.S. Pat. No. 5,732,400 (System and Method for Risk-Based Purchase of Goods) issued on Mar. 24, 1998 to Mandler et al. which describes means for utilizing an online repository of credit information for a risk classification of the buyer, followed by the determination of a discount-fee based on this risk classification. However, this is a stand-alone system and furthermore, considers only one aspect of counterparty risk, namely the risk of the buyer defaulting in making payment. There is a need to take into account the seller-side risks (related to delivery and quality aspects) and also the need to incorporate the risk classification and discount-determination module into a larger system where the final price determination may need to take into account many other factors. Further, the discount fee should be determined before deciding on a transaction so that the fee information can be utilized in making better matching decisions.
Many other uncertainties and risks also exist in e-commerce negotiations and transactions. For example, those related to delivery and payment delays, damage/loss of goods etc. For many of these risks (for example, damage/loss), the insurance approach is commonplace. However, for others, there is a need to provide means for enabling buyers, sellers and electronic marketplaces to allow them to take their implications into account adequately for making buying, selling and pricing decisions.
In summary, the prior art does not provide adequate means for e-commerce negotiations and transactions across international borders wherein the various uncertainties and risks associated with these negotiations and transactions can be adequately taken care of and their effects incorporated into making of the decisions related to assignment of items and determination of their prices.